Update on the CMA's investigation into the UK energy market

Background

On 26 June 2014, Ofgem (the UK energy regulator) referred the UK energy market to the Competition and Markets Authority ("CMA") for an in-depth market investigation. An initial market assessment had identified persistent competition issues in the supply and acquisition of electricity and gas in the UK, despite multiple reforms in the market in recent years. The investigation is now well underway and the CMA has started to publish certain interim findings and reports.

The CMA's investigation is aimed at identifying any features of the energy market which prevent, restrict or distort competition. If and when such features are exposed, the CMA has the power to impose remedies or to recommend remedial action to sectoral regulators (in this case, Ofgem).

On 18 February 2015 the CMA published an updated Issues Statement, which provides an overview of the progress of the investigation, revised theories of harm and also sets out its initial views on the evidence received to date. A stream of working papers was also published in February and March 2015. These cover different aspects of the market including "The Profitability of Retail Energy Supply: Profit Margin Analysis", "Capacity" and "Market Power in Generation".

Recent CMA publications

The updated Issues Statement, published on 18 February 2015, sets out two main changes; an extension of the investigation of the wholesale market as well as a closer look at the effect current regulation has on competition:

Theory of Harm 1 has been broadened and now reads: "the market rules and regulatory framework distort competition and lead to inefficiencies in wholesale electricity markets." The CMA is therefore broadening its investigation into the wholesale market and is now looking at both the effects of 'low level liquidity' (Theory of Harm 3a) as well as the market rules and regulatory framework. It appears to support the replacement of ROCs with CfDs (which will be welcomed by the government) but has highlighted potential risks in respect of price reforms potentially overcompensating generators; the absence of locational pricing of constraints and losses; and a potential lack of competition in the CfD allocation mechanism which may mean that CfDs are not allocated to the most efficient projects or at least cost to energy consumers.

Theory of Harm 5 now argues that "the broader regulatory framework, including the current system of code governance, acts as a barrier to pro-competitive innovation and change". The CMA is therefore looking at whether industry codes could act as a barrier to entry and/or pro-competitive innovation and change, because it has received submissions that the codes may be distorting incentives, increasing barriers to entry or stifling innovation. In particular, it highlights that there may be too many codes, which increase compliance costs, in particular for smaller companies, and that there are often no fixed deadlines for taking decisions under the codes, which can unduly hold up potentially beneficial reforms.

Certain other interim conclusions by the CMA in relation to the generation/wholesale side of the businesses are likely to be welcomed by the Big Six. For example, the CMA has not found evidence that their generation businesses have earned excessive profits, nor that wholesale prices have been above a competitive level. nIt also appears to conclude that there is no coordination between the Big Six at that wholesale level and that it is unlikely that they could use market power to withdraw capacity and increase profits. The CMA's focus in respect of the Big Six's own incentives and behaviour therefore seems to have largely shifted to the retail markets.

Conclusion

Energy is, of course, a vitally important product for both households and businesses. This explains the media scrutiny to which this particular market investigation is subject. Market players and consumers alike are now patiently waiting for the final findings of the CMA. The investigation should be limited to 18 months by the relevant UK legislation meaning that the current deadline for the CMA's final report is 25 December 2015.

However this could still be extended by six months if there are special reasons to justify doing so.